2.  

Ken, a bond fund manager, would like to transfer the credit risk of the 3 year ITK corporate bonds with a notional 20M. He meets John, an equity fund manager, who wants to transfer the price risk of AAP stock with a notional 20M. They agree to form a Total Return Swap for risk reduction. The bond is paying a return 5% per year. Draw the with the payments for all the parties. swap (7 marks)